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GDP growth disappointed in the second quarter (Q2), 5.5% year-on-year (y/y) vs consensus of 5.9%, even lower than the first quarter’s (Q1) 5.6%. It raises issues (see below) given the broad-based deceleration: industry (except Services) and slower expenditures by consumer, (5.6% from 6% in Q1-2019); government (6.9% from 7.4%, same period) and fixed capital formation, (contracted by 4.8% from Q1’s growth of 6.4%). The former two were initially expected to recover and hasten growth in the last quarter.

Expect the market to follow the correction seen in the global markets. The PSEi is expected to trade somewhere around the 7,700 – 7,900 support, dragged by global headwinds, MSCI rebalancing, and local corporate earnings. Trade war escalation will remain the theme in the global market for the week, although we may find some comfort from a stronger case of policy rate cut in the next FOMC meeting in September. For his part, BSP governor Diokno announced that the BSP is poised to cut policy rates by 50bps before the year ends, with some already expecting the first 25bps to be announced as early as Thursday’s meeting.

Local yields may further drop this week as the market prices in expectations of Monetary Board’s (MB) 25-bp policy rate cut on August 8 due to sustained deceleration in July inflation of 2.4% released today and another sub-6% GDP growth in Q2-2019 (Quarter 2; 5.9% consensus) to be released on August 8. In addition, BSP Governor Benjamin Diokno announced today that the MB will cut policy rates by 50bps for the rest of the year, albeit timing remains data dependent. BSP’s inflation forecasts were also trimmed to 2.6% from previous estimate of 2.7% for 2019 and 2.9% from 3% for 2020.

The likely Fed rate cut and corporate earnings are expected to support the market this week at 8,100 but we recommend a hold on buying ahead of MSCI semiannual index review next week, August 8. Key economic data are scheduled to be released for 1H19 like inflation and GDP, unless there are positive surprises from these releases, we might see the market testing to break the support of 8,000 as foreign funds rebalance in favor of China A-shares.

Expect local bond yields to remain rangebound as the local and international market have largely priced in the Fed cut this week. We don’t think US President Trump’s comments (“will only do little”) on the possible 25bps cut will change the Fed’s course. But the Fed’s move will reinforce China and E.U’s further lowering interest rates and pumping money to help their slowing economy.

Economic and secondary indicators gained strength in the second quarter. Government expenditure up 7.8% in the month of May, coming from 15.1% decline in April. Year-to-date (YTD) still down 0.8%, but already shown improvement from 3.2% decline in the first four months.

The foreign borrowing in August, the Samurai bond worth $1.0bn to $1.5bn, will help shore up the already peak $85bn gross international reserves, bolster supply in effect and boost market psychology in favor of the peso. These planned borrowings and recently concluded $2.7bn worth (Panda, Global and Eurobond from January to April) that had the balance of payment in surplus of $5.2bn are muting the effects on market psychology of the negatives such as the still growing trade gap, $16bn as of May and 14% drop in foreign direct investments as of April.

Expect the market to consolidate in the 8,100 – 8,300 level this week as investors remain on the sidelines ahead of 1H19 results. We expect SM to post steady growth as BDO is poised to sustain strong growth it showed last quarter and SMPH already announced it grew 16% in 2Q. For the other index names, we keep our eye on indications for possible recovery from the poor 1Q19 results.

Expect local bond yields to remain rangebound with a downward bias as both local and international markets try to gauge the extent of the Fed cut by the end of July. Markets priced in a 71% chance of a 50-bp Fed cut last week after New York Fed President Williams said that it would be better to act quickly at the first sign of economic distress, which was echoed by other FOMC members later on. Odds of a 50-bp hike have since gone back to 23% (as of July 22) after a clarification that the statement did not just pertain to the upcoming meeting but for the rest of the year.

A healthy pullback this week is in the cards after the PSEi knocked on the lower end of the band of our 2019 index target of 8,400 – 8,800. This is the natural course after a big rally of 222 points in two days, similar to what were seen early in the year, when the PSEi rose by 217 points and in November last year which saw it climb by 248 points.

The local 10-yr government bond rate is likely to be rangebound, from a low of 4.89% (today’s lowest) and 5.1% (last week’s high). The consolidation is on the back of the market having fully priced in all the pending rate cuts in the horizon, both that of the BSP (a 25bp cut as soon as August) and the Fed’s. Another factor is the BSP’s preemptively siphoning off liquidity from this week’s government debt maturities worth Php40bn of FXTN 7-54 series on July 19, Php14.7bn worth of T-bills on July 17 and maturing corporate bond of SM worth Php4.64bn today (July 16) for a total of Php59.34bn released into the system.

Wall Street closed at new peak. Boom! America’s S&P 500 index has closed at a new all-time high last night. And it’s again about the Fed’s dovish tone. Federal Reserve Chair Jerome Powell told the US Congress about a pending rate cut this month, citing risks from the trade truce with China and that June’s strong U.S. jobs report (higher than expected at 224k versus average of 160k monthly in recent months) had not shifted the outlook.

Expect local bond yields to remain subdued with appetite still mainly in the short-end, which fell last week by an average of 16bps against the long-end’s 9-bp average decline. Buying interest in the short-end was reflected in the dramatic 50-bp drop of the 91-day bill rate to 3.88% and the slight correction in the long end from of 4.9% to 5.10%.

This week, we expect the resistance of 8,100 to hold, meaning PSEi will again struggle to break above it as the market recently sold on news of the June inflation beat and ahead of Fed’s Powell Congressional appearance amid the US markets’ correction after hitting new all-time highs. US and Philippine second quarter earnings results are coming out in the next two to three weeks and guidance for the rest of the year will be closely watched.

We expect the market to remain steady around the 7,900-8,000 range in the absence of catalysts. All eyes are on the G-20 summit where the market expects no trade deal between US and China. Without any clear direction or indication of a deal between US and China, overhang is expected to remain which will keep the index from rallying upwards. Trade war and increasing geo-political tension between US and Iran have already been priced in and have been met by dovish central banks led by the Fed, providing support for equities market.

Lower inflation expectations make rate cuts more likely in the near future. Both the Fed and the Bangko Sentral ng Pilipinas (BSP) kept policy rates steady during their meetings last week, which was expected though the former sounded more dovish. The market expected the Fed to give strong signals towards monetary easing, which reflected on the rate cut odds next July: a 57% chance of a 25-bp cut and 43% for a 50-bp cut.

The market will likely hold steady at the 8,000-level this week even with the escalation of the trade war and ensuing likely preponderance of weak global economic data reminding investors of the slowdown in both developed and emerging markets. We believe that the pending policy stimulus in the US such as an early US Fed rate cut or more fiscal measures in China would help lift sentiment and share prices. Also, Trump has already reneged on his threat of imposing 5% tariff on Mexican exports.

After retesting the index’s resistance of 8,200 yesterday, we expect some profit taking in the market as some names have charted new 52wk high. Also shortened trading week this week (Eid’l Fitr) and next week (Independence Day) may prompt some investors to take profits. We expect that May inflation figure (June 5, 2019) coupled with anticipation of further monetary easing shall provide support for the market.

Bangko Sentral (BSP) governor Benjamin Diokno promised for more policy rate and reserve requirement (RRR) cuts in the future, but the timing will depend on economic data. Diokno expects inflation to ease below 2% on base effect as soon as this quarter, while he expects GDP will to reach at least 6% again now that the budget has been passed. The BSP expects May inflation to have slowed to 2.8%-3.6% from 3.0% last April and 4.5% in the same period last year.

We expect yields to remain under pressure ahead of the staggered reserve requirement (RRR) cut this week, next month, and in July. Another factor is the Php112bn budget surplus of the national government and the recent euro and panda borrowings totalling $1.2bn under competitive rates following the Philippines’ recent credit rating upgrade to BBB+. Local yield curves tracked the downward movement in US Treasuries amid escalated trade tensions.

We’re looking at the 7,600-7,800 range this week. MSCI rebalancing took effect yesterday (May 28,2019) which was expected to result in a $150m outflow from passive funds. Since the announcement (May 14,2019), the Philippine market saw $220m net foreign outflows but the index held on and even gained 1.31% as of Friday’s close. We think that the 7,600 will hold due to bargain hunting but the 7,800 might be hard to break in the absence of catalysts.

The peso dollar rate is even stronger than where it was (Php52.44) in the beginning of the year to today’s close of Php52.18 (May 24, 2019) even with the announced rate cuts of the BSP. News flow favored the peso. First, Fed’s most recent talk was not taken by FX markets to mean a strong dollar in the horizon. The US Dollar index has been steady year-to-date (YTD), seen more to be weaker to stable than on the strong side due to US rate cuts in the offing. Fed futures predict it by year-end.

We have a HOLD recommendation for GT Capital (GTCAP) with a NAV-based target price of Php994 (see Table 3 for valuation summary). We believe transitory hiccups in the auto sector will be offset by the growing portion of banking (Metrobank, MBT; consensus target price: Php89) and infrastructure (Metro Pacific, MPI; consensus target price: Php6.50) to income at 54% (as of 1Q19, 61% in 2019E) and 20.1% (as of 1Q19; 15% in 2019E), respectively. Fed Land, which we expect will contribute 10% to 2019E income, will have back-ended revenue bookings this year as completion rate catches up.

Growth of 30 PSEi member companies’ core earnings (unweighted) in the first quarter of the year (1Q19) was 5.2%, a disappointment and short of the 10% expected by us. Six were above expectations namely, BDO, +66%; URC +3%; FGEN, +28%; MER, +14%; GLO, +45%; and TEL, +6%. Eleven were below led by AC, -10%; AEV, -27%; DMC, -30%; GTCAP, -9%; and SMC, -30%. Thirteen were in line. Other brokers’ research units showed a wide range of 3.9% to 9%.

Some say that the GDP slowdown in the first quarter (1Q) to 5.6%, the lowest in the past five election years of 2004, 2007, 2010, 2013 and 2016, was largely due to the government budget impasse. Our calculations showed that had government spent 11% versus the 7% actual, GDP would have reached 6%.

We expect the index to trade in the range of 7,600 - 7,800 this week after the rally produced by the BSP liquidity easing last week which enabled the PSEi to break above 7,600. Will it stay there? It could as the overhang from MSCI rebalancing subsides, offset by the downside coming from developments in the US-China trade war saga.

Profit taking ensued in the bond market last week following the Bangko Sentral’s (BSP) widely-expected decision to cut the reserve requirement ratio (RRR) by 200bps, which will happen on a staggered basis (100bps in May 31, 50bps by June 28, 50bps by July 26). However, we expect downtrend to resume especially in the short end, where yields for the 1-yr benchmark (5.97%) is still higher than the 10-yr (5.79%). The cut, which is expected to release Php180-200bn into the financial system, together with the earlier 25-bp policy rate cut was meant to stimulate the economy that slowed to a 5.6% growth in the first quarter.

Philippines economy expanded by 5.6% year-on-year (y/y) in Q1-2019, missing both government and analysts’ estimates of above-6% growth. Last quarter’s GDP print cut short the 15 consecutive quarters of above-6% growth and bucked election year Q1 expansion of above-6.5% since 2004. Growth was dampened by slower government spending and decline in public construction as the national government operated on a reenacted budget, coupled with deteriorating net exports and weak industry.

Because credit rating upgrades underline the sound fundamentals of a macroeconomy supporting its ability to pay, the impact of such a favorable even is more on the externally-related accounts. More specifically, investor confidence is boosted by the higher credit rating so foreign direct investments (FDIs) go up, which form part of the current account balance, which in turn, should also show incremental improvement.

We have a DCF-based target price of Php22.6/sh for Manila Water (MWC), just 1.6% higher than its last trading price. Management said that the penalty paid last quarter of Php534mn already covered expected additional expenses for water supply normalization for the rest of the year and thus expects no further penalties. Any spillover costs (deep well development costs, water treatment, ~Php15mn in waived bills in April) to address the water shortage may dampen the effect of the first tranche of the tariff hike (+5%). Though new water sources were identified, management remains cautious of a repeat of the shortage.

The Bangko Sentral ng Pilipinas (BSP) cut policy rates by 25bps to 4.50% last week but kept the reserve requirement ratio (RRR) at 18%, which disappointed the market that largely expected an RRR cut amid tight liquidity. The BSP indicated that it will discuss an RRR cut during its weekly meeting this Thursday.

We might see the index firm up around the 7,600 support. This support sits close to the index’s two standard deviation below the 5-Yr mean (-2SD) of 16x or 7,545 index level. Long term outlook remains robust as corporates manage to report earnings in line with expectation. Also the weaker than expected GDP and the expectation of lower inflation increases the chance of further monetary easing. However, we encourage caution and to sell on strength this week as immediate risks are imminent.

Expect some profit taking on rally this week which may bring the PSE to 7,800-7,900. Philippine April inflation came in at 3.0%, lower than the median forecast of 3.1%. We believe that despite the easing inflation, this will be offset by weakness in 1Q19 Philippine GDP and heightened volatility brought by Trump’s tough stance on tariff against China.

We cut our earnings forecast for Aboitiz Power (AP) this year by 8% to Php22.4bn due to forced outages in the first quarter and some spill over in the second. This is 6% lower than last year’s core income of Php23.8bn and 3% higher than the headline income of Php21.7bn. AP could still be buying from the spot in the second quarter, approximately 557GWh, and put downward pressure on margins albeit to a lesser extent than in the first.

A resolution is finally in sight with Metro Pacific’s (MPI) regulatory issues with the partial approval of NLEX’s tariff catch-up and Maynilad’s rate rebasing. There are still pending increases for missed tariff adjustments for SCTEX (2011), CAVITEX (2013, 2014, 2017), and two more years for NLEX (2016, 2018), but there is a case for optimism given the tentative schedule for the increases from the management’s discussions with the regulator. We believe that a complete resolution could: (1) abate MPI’s need to borrow for its projects. MPI earmarked around Php48bn for investment allocations across its businesses; (2) soften the blow of higher financing costs to bottomline; and (3) narrow the discount to MPI’s net asset value (NAV) which is currently at 60% due to regulatory overhang.

We expect bond yields to be rangebound after the rally last week as the market awaits the Bangko Sentral’s (BSP) move this Thursday. Lower April inflation print bolsters view of faster easing but this may weaken the peso as a Fed cut this year grows more uncertain due to inflationary tariffs (25% from 10%) on $200bn worth of Chinese imports, which may soon include $357bn more.

Standard & Poor’s (S&P) raised the Philippines sovereign credit rating from BBB to BBB+ with stable outlook. Thus, PSEi may rally and easily break above 8,000 on account of the credit rating. The market will also take its cue from the April inflation print and earnings results this week from Metro Pacific Investment Corp., Integrated Micro-Electronics, Inc., Aboitiz Power Corp. and Aboitiz Equity Ventures, Inc. (May 2).

The market is anticipating the issuance of $200-$500mn panda bonds towards the end of this month, which explains the slight uptick in yields last week. Recall that $230mn worth of panda bonds were also issued in March last year. The government is looking at tenors of three to five years as yields followed inflation downtrend in the past few weeks. The Bangko Sentral (BSP) is widely expected to ease monetary policy during its next meeting in May if inflation continues its downtrend.

The PSE Index is expected to trade at the tighter 7,800 – 7,900 range, with downward bias, in the absence of catalysts to support the index in the near term, locally. We expect some selling pressure as the market turn cautious on the 1Q19 GDP results scheduled in May. Despite the lower inflation in the first quarter which was a positive development, the offset was government spending which was flat year-on-year due to the re-enacted budget.

Rising global oil prices due to output cuts led by the OPEC drove global bond and local bond yields higher last week. OPEC’s enacted output cut of 1.2mn barrels per day last January for six months which may need to be extended until the end of the year, US sanctions on Iran and Venezuela, and renewed fighting in Libya have driven oil prices by 40% (Brent: $71.1/bbl) since its low late last year. Local gasoline stations are already warning of another price hike on April 16 of around Php1/liter for gasoline and Php0.75/liter for diesel or around a 2% increase for both. This will be the second consecutive week of increase and will bring the net increase this year to Php7.95/liter for gasoline and Php5.40/liter for diesel or around 20% year-to-date (YTD).

We have a buy on dips recommendation for MWIDE with a revised target price of Php20.8sh (+17% higher)as we raise the construction segment’s target P/E from 10x to 12x and raise the terminal growth rate from 2% to 3% to reflect the potential Mactan Cebu International Airport (MCIA) expansion. MWIDE’s stock price peaked to Php22.55/sh, up +22% year-to-date (YTD), on news that government is pushing for the airport’s expansion. It has fallen by as much as 7% after the release of its earnings but is still up by 13.8% YTD.

We’re expecting the market to rebound this week and trade at the higher 7,900-8,100 range, encouraged by falling inflation affirmed by the lower-than-expected inflation print of 3.3% in March. The BSP stands ready to ease monetary policy amid a backdrop of challenging global economic outlook. Concerns of rising oil prices brought by conflict in Libya is offset by continued decline in rice prices as rice tariffication law IRR was already signed.

The local yield curve remained slightly inverted at the 1-yr against the 10-yr as the government borrowed at even higher rates than secondary market rates. The rate downtrend to 5.6% proved short-lived and unsustainable as the rally was sold down on the view it won’t take long for government’s strong cash needs to resurface despite an earlier announcement that second quarter borrowing will be lower than the first quarter of this year by Php45bn to Php315B. This is also lower than Q2-2018’s P325B borrowing program.

The end of Quantitative Easing (QE) was hard on Security Bank. Senior management in the last earnings briefing hinted that higher interest rates was partly behind the drop in ROE. ROE dipped to single-digit (first time in ten years) when earnings contracted by 16% to Php8.6bn in 2018, more than analysts expected at 13% dip.

The Bureau of the Treasury (BTr) said the government plans to borrow Php315bn domestically (Php195bn in T-bills and Php120bn in T-bonds) in the second quarter. This is Php45bn lower than the first quarter program with the cut coming form the T-bill volume. The reduced borrowing coupled with the budget delay will keep yields subdued.

We might see slow accumulation toward weekend and a sell on news stance by fund managers after the inflation number comes out this coming Friday. The trading range for the PSEi is a narrow 7,800-8,000, trapped within this range due to many concerns ranging from the BSP’s policy stance to global economic slowdown. The dovish BSP will support the view there will be monetary easing this quarter, a likely triple RRR cut in May.

GT Capital’s (GTCAP) core income fell by 9% YoY to Php13.7 bn, behind consensus (90%) and our own (96%) estimate. After fair value adjustments and preferred dividends, net income to common equity holders fell by 6% to Php12.8bn, also 6% lower than our estimate. Earnings were dragged by lower auto sales (-17% YoY to 153k) and margins (from 12.4% in 2017 to 11.0% in 2018) in Toyota Motors (TMP; standalone income down down 40% to Php8bn) and higher costs in Fed Land (standalone income down by 13% to Php1.2bn). Metrobank (+21% to Php22bn), AXA (+25% to Php3.1bn), and Pro-Friends (+63% to Php 1.2bn) slightly offset the losses while MPI (+7% to Php15.1bn) was relatively flat.

The PSEi may hover between 7,700-8,000 as global recession fears amid weak economic data from Germany, US’ yield inversion and Brexit uncertainty as UK approaches the scheduled deadline to leave the EU may weigh down sentiment. On the domestic front, the signing of the P3.7trn national budget for 2019 after the Senate transmitted the bill to the office of the President yesterday may temporarily lift the market.

A more dovish Fed and weak economic outlook led to a yield curve inversion -- a recession signal -- in the US (UST 1-mo: 2.49%, 3-mo: 2.46%, 6-mo: 2.48%, 1-yr: 2.45%, 3-/5-yr: 2.24%, 10-yr: 2.44%) which in turn spooked local investors. The Fed cut its forecast to no rate hikes for this year from two just three months ago, while the market priced in one 25-bp cut this year. Aside from holding rates steady, the Fed also downgraded its GDP growth forecast this year to 2.1% from 2.3% and inflation forecast to 1.8% from 1.9%.

In LT Group’s briefing which houses PNB as part of the conglomerate, PNB management announced their bold targets for the bank of double-digit earnings growth from flattish Php5.9bn last year, 12% ROE in 3 years and a plan to resurrect PNB’s glory days in big league banking, let PNB be back among the top three big banks in the country, with total assets of more than Php2 trillion. PNB has total resources of Php983bn.

Semirara Mining & Power Corporation (SCC) power asset managers don’t want to contract its power generation capacity, at least not long and much of the 300MW South Luzon Power Gen whose contracts with Meralco have expired. Instead, it is playing the spot market whose price it bets will shoot up amid a looming power shortage rooted in the hanging seven power supply agreements with the revamped ERC. Also Malampaya will be on shutdown by October.

The PSEi is trapped between the range 7,700-7,900 as investors ponder many uncertainties arising from: (1) the delay in the approval of the national budget that could lead to growth slowdown in 2019; (2) a record high current account deficit in 2018 at $7.9bn or 2.4% of GDP from just $2.1bn or 0.7% a year ago; (3) unimpressive corporate earnings in 2018; and (4) FOMC and MB decisions this week that are widely expected to keep policy rates unchanged. Meanwhile, corporate earnings results were mixed. Out of the 28 companies that have released their full year earnings, nine outperformed the consensus, nine were in-line and 10 were behind.

Bond yields took a breather from its month-long rally last week as the market faced uncertainty with the unsigned national budget. Although recently, the House agreed to recall its version of the General Appropriations Bill (GAB) in favor of the Senate’s version. The Php3.7tn budget was in danger of getting unsigned until the later half of the year and was estimated to shave off 1.6%-2.3% in the nation’s 2019 GDP. The earliest the bill can get signed is April.

We maintain our buy for Aboitiz Power (AP) with a sum-of-the-parts DCF-based target price of Php40/sh, an upside of 14% from its last closing price. While other power generators are shelving projects in a buyers’ market, AP is making up for declining margins by beefing up their capacity and sales volume through greenfield projects and acquisitions. Its $579mn acquisiton of AA Thermal, AC Energy’s wholly-owned subsidiary housing its GN Power assets, was recently approved by the Philippine Competition Commission (PCC).

Aboitiz Equity Ventures (AEV) whose core net income dropped last year by 3% to Php23bn is looking at slightly better income this year, flat at best and with consensus just 6% growth, with the expected recovery of AP mainly but with some offset from other business segments: Food business, Pilmico, will see improvement in cost of raw materials, key of which is wheat. Union Bank will see a return to loan book of a sizable teachers’ loans as approved by the Department of Education Quantity undisclosed.

The PSEi may trade sideways this week amid mounting worries over global growth slowdown and dearth of domestic catalysts. So far, corporate earnings have failed to excite the market as results were mixed. Out of the 26 companies that have released their earnings, nine outperformed consensus, eight were in line and 10 were behind.

Former Budget secretary-turned Bangko Sentral (BSP) governor Benjamin Diokno signaled that monetary policy should be in sync with the Duterte administration’s expansionary fiscal policy -- aside from economic data considerations -- and that there is room for easing given that: 1) local inflation is trending down and heading back towards the government’s target band of 2%-4%; 2) Fed’s dovish signals; and 3) weaker global growth outlook.

Eagle and Cemex are at an inflection point and may have seen the worst in 2018. Both have announced sales volume growth last year, a sign demand is picking up after a huge market share loss in 2017 due to cheaper imports that gained market share of 15% since 2015 or 4.5mn of last year’s total supply of 30mn tons.

BDO had a very strong finish in 2018. It only made Php21.6bn in net profits as of 9mos 2018 and in the fourth quarter the full year number was a higher Php32.7bn, up 17% and beating the Php31bn profit guidance set early in the year. It’s an additional net income of Php11.2bn in 4Q18 alone, coming from a weak start this year of 1Q, 2Q and 3Q net profits of Php5.9bn, Php7.3bn and Php8.4bn, respectively; far from the guidance of Php31bn.

We maintain our buy rating for Metro Pacific (MPI) with a target price of Php7.23/sh, as we think that the market’s regulatory risk-aversion with MPI will subside after a couple of approved rate hike increases in its water and toll roads businesses. MPI is still currently trading at a ~50% discount to NAV, while our target price already imputes a 25% discount.

“Amazing” was how Ayala Land Inc. (ALI) President and CEO Bernard Vincent “Bobby” Dy described ALI’s 2018 earnings, up 16% on reported basis to Php29.2bn and even higher at 20% on recurring basis. Budgeted residential project launches were Php110bn early in the year but ended higher (based on actual) on strong demand with total full year launches of Php139.4bn. Margin headwinds didn’t show, instead EBIT margin expanded to 33% from 32%. Residential sales reservations were up 16%, average of Php12b monthly.

DNL is guiding for net earnings of 10%-15% this year to Php3.5bn to Php3.7bn after making Php3.2bn last year, up 10% and in line with consensus estimates. Results were pushed higher by record 4Q18 gross profit margin (GPM) of 22%. Full year GPM stood at 19.1%, better than 17% in 2017. Net profit margin improved to 12% from 11.5% in 2017.

We expect flattish earnings growth this year; just up by 4% to Php23.4bn (revised upward by 13% from Php20.6bn) as San Buenaventura (SBPL) will come online in 3Q19. We expect profit of about Php500mn in a quarter’s worth of commercial operations from the plant (MER share: Php250mn) and Php600mn from organic growth, but we note that a lower rebased rate (if it pushes through in 4Q19) is a risk to profit growth. Our earnings estimate translates to a 2019E P/E of 18x, right at MER’s 5-yr historical average.

Local inflation last February was a nice surprise, hitting 3.8% which was lower than consensus expectation (4.0%) and January’s 4.4%, mainly driven by food and non-alcoholic beverages, alcoholic beverages and tobacco, and transport. This dislodged the peso from strength from almost a year-low of Php51.710 to back to above Php52 on hopes of lower interest rates. This also boosted the odds for a reserve requirement cut. Meanwhile, the Bangko Sentral (BSP) expects inflation to trend lower for the rest of Duterte’s term, which could apply downward pressure on the yield curve.

The PSEi is on an upward mode this week as investors digest the slower-than-expected February inflation print (3.8% vs consensus of 4.1%) and renewed optimism over US-China trade deal. So far, earnings results have failed to lift the market. Out of 20 companies that have released their full year earnings, six were ahead of consensus, seven were in-line and seven were behind. This week, earnings releases to watch out for are MPI and DNL (March 6); EAGLE (March 7); TEL, DMC and ICT (March 8); and AEV and AP (March 9).

The peso yield curve is resurgent and sensitive to news of fresh debt supply, especially from government. The much anticipated Retail Treasury Bonds (RTB) was one of such, Php30bn on Feb. 26 (auction date) and much less than the equivalent of last February 19’s debt maturities of Php80bn. That has caused upticks both in the short and long-end of the curve; the 91-day, up 18 bps; 182-day, up 4 bps and 364-day, up 2bps while the 10-year government bond rate rose back to 6.3% after a blip downmove to 5.95%.

The PSEi may hover between 7,900-8,000 on lack of clarity on the progress of US-China trade talks despite Pres. Trump waiving the deadline for the tariff hikes on Chinese goods originally scheduled on March 1. On the local front, full year 2018 earnings results were mixed -- two were ahead of consensus (GLO, BDO), three were in-line (JFC, ALI and SMPH) and two were behind (CHP, IMI). This week, MER (February 26) and SM (February 28) will also release their full year results.

The market braced for the Php30bn 5-yr retail treasury bond (RTB) auction which was priced yesterday (February 26) and will settle on March 12. The Bureau of the Treasury (BTr) instead raised Php113.8 bn, a bit over four times its intended offering amid strong demand with tenders totaling Php121.8bn. We expect significant upward bias on the yield curve as the paper is expected to sell within the range of 6.125%-6.25%, at least 150bps higher than the last auction in November 2017. The 5-yr benchmark closed at 6.127% last week.

PSEi’s rally has lost momentum. And that’s largely due to a market that has fully priced in all the good news, local GDP growth of 6.1% in the fourth quarter and 6.2% for the whole year 2018 as well as the inflation downtrend to last January’s low of 4.4%.

Despite healthy topline growth of 24% to $1.3bn, Integrated Micro-Electronics’ (IMI PM) recurring income in 2018 fell by 25% to $28.4mn, behind consensus estimate of 14% growth to $39mn, due to: 1) higher costs of materials due to global component shortage; 2) higher expenses to expedite deliveries driven by the aforementioned shortage; 3) reconfiguration costs and operational difficulties in IMI’s Mexico facility. As a result, gross profit margin compressed by 180bps to 10.1%, down from 9M18’s 10.3% as margins in the fourth quarter plunged down to 8.4%. Headline income was buoyed by one-off gains from the Shenzhen plant relocation and STI acquisition, up by 33.8% YoY to $45.5mn. Minus revenues from new acquisitions STI and VIA, the core business still grew by 16%.

The PSEi may trade higher this week, between 8,000-8,100, amid optimism on US-China trade deal after the leaders of both countries sounded upbeat on the progress of the trade talks over the weekend. Investors will also closely await the release of the FOMC minutes on February 21 to look for signs that could veer off the Fed from its dovish stance. On the domestic front, corporate earnings results were mixed.

Market is jittery of looming debt supply and looks upward bound. Around Php70bn worth of debt papers will mature on February 19, fueling speculation about an RTB float and just how much short of cash is government. The Bangko Sentral (BSP) also did not signal any rate cut or reserve requirement cut soon, which led to the slight upward correction of bond yields. We expect yields to continue to have an upward bias this week.

The market may consolidate between 8,000-8,100 this week in the absence of progress in the US-China trade talk (especially on intellectual property). The trade truce will end on March 1. The market will also take its cue from earnings results this week from GLO (February 12) and ALI (February 15). So far, earnings results (for full year 2018) were below consensus for CHP (losses of P599mn, ex-forex losses) and IMI (-21% to $25.8mn, ex-non-operating items).

Last week, the market bought on better-than-expected inflation news but was wary on a rumored possible retail treasury bond (RTB) issuance. We expect the market to remain cautious of this, causing the yield curve to be rangebound on heightened risk aversion anew to long duration and a preference for the safety of the short but high yield portion of the curve up to the belly.

PSEi’s ascent is pricing in already the potential rate cuts (policy rate and reserve ratio) whose odds rose with the inflation deceleration. PSEi’s rally is in sync with the emerging market (EM) wide rally as it price in a likely trade deal between the US and China by month-end. The PSEi may trade between 8,000-8,300 this week as investors digest the easing domestic inflation pressure for the third straight month in January to 4.4% vs consensus of 4.5% and amid appetite for riskier assets due to dovish Fed.

Dovish Fed amid risk-on sentiment and lower local inflation pushed local yields lower last week. The Fed met for the first time this year last week and kept rates steady, as expected, with a notably dovish stance. Though the monetary board do not see a recession any time soon, it noted that there is some economic slowing.

The best performing stocks year-to-date are not in the 30 company PSEi whose year-to-date (ytd) gain is a lower 7.6% (in USD terms) but in the broader set of stocks in the so-called MSCI IMI investable market indices encapsulated in the US listed ETF Ishares MSCI Philippines with a higher price appreciation of 8.8% gain, same period. This comprised 43 stocks (inclusive of the PSEi) that in turn represent 99% of the Philippine free float adjusted market capitalisation of Php7.6 trillion as of today, bigger than PSEi’s 51%. Apparently, the foreigners are buying not just the blue chips but the entire Philippine market.

US Fed hike of two this year is widely perceived to fall in the second half. It may mean that the first half of this year could be the richer window to make money in the local stock market. It may be too late for a “Sell in May and Go Away.”

Positive Newflow in the cement industry included of late the quoted price for Holcim’s Philippine asset sale at $2.5bn or Php132.5bn. The tag price which could set a valuation benchmark for the challenged industry reinforces the share price recovery that began after the recently slapped 4% tariff on cement imports two weeks ago.

The PSEi may trade cautiously this week between 7,900-8,100 as investors await the high-level trade talks between US and China later this week and amid renewed fears of US slowdown following disappointing earnings results. On the domestic front, investors will await the January inflation print which will be released next week and the start of the earnings season.

The Fed will meet this Wednesday, January 30 (PH time, Thursday, January 31) and is expected to stand pat (Fed futures prices imply 100% odds of a no hike) amid growing concerns of slower global growth outlook. This sentiment was echoed by the European Central Bank (ECB), saying that downside risks may necessitate significant stimulus. The latest casualty of slower growth outlook: Taiwan, with 2019 GDP expected to grow by 2.2% from 2.7% last year.

Yields continued to drop amid strong demand that ate up the influx of fresh supply. Local investors are locking in and chasing yields at the possibility of further interest rate drops. In a BSP survey conducted recently, analysts and economists expect inflation to decelerate to 4.1%, lower than the previous estimate of 4.3% but higher than the BSP’s downward-revised forecast of 3.18% (from 3.5%), and 3.8% in 2020, also higher than the BSP’s 3.04% (from 3.3%) forecast but finally within the 2%-4% target band.